Shares of GAIL surged 4.5 percent on Monday to its 52-week high of ₹122.85 apiece after brokerage house UBS double-upgraded the stock to 'Buy' from 'Sell' and raised its target price on the stock to ₹150 from ₹80 earlier. The new target price implies a 22 percent upside from its 52-week high, hit in intra-day deals today.
The brokerage said that GAIL shares are trading at a 50 percent discount to historical averages and believes that the markets are yet to fully price in the upside to realised tariffs (from tariff integration), as well as the scope of India's improving gas demand and GAIL's pipeline expansion.
These factors, it said, could trigger a series of margin-led consensus earnings upgrades for the stock, it added.
Further, higher earnings contribution from the more stable transmission business (52 percent of segment EBITDA in FY24-26 vs 34 percent in FY22-23) indicates the business is becoming more structural rather than cyclical, it noted.
GAIL is a state-owned enterprise, with the Government of India holding a 51.9 percent stake. It is India's largest natural gas company, with other businesses including a liquid hydrocarbon business. It is likely to announce its June quarter earnings today.
"A return of the utility nature of the business could lead to a re-rating of the stock, in our view. GAIL is trading at 24 percent/50 percent discounts to its 10-year average P/BV and PE, and a deep discount in investment value, making its risk/reward favourable. We double upgrade to Buy and raise our price target from ₹80 to ₹150," UBS said. The brokerage's FY24-26E standalone EBITDA for GAIL is 21-29 percent, ahead of consensus. UBS expects 8 percent compounded volume growth (CAGR) over FY23-26.
“There is scope of further upward revision in tariffs in the coming months (as the regulator had considered lower gas prices in the previous tariff order), which is not built in our base case,” it noted. The cost of gas used as fuel for transmission has also materially declined in FY24 YTD, thereby improving margins, added the brokerage. It forecasts a 42 percent CAGR in transmission EBITDA over FY23-26.
The brokerage also estimates India's gas demand could grow from 165 mmscmd in FY23 to 200 mmscmd by FY26, given improved domestic gas supply, ramp-up in utilisation of new/ upcoming LNG terminals as well as lower LNG prices improving affordability. GAIL's pipeline expansion could enable an 8 percent volume CAGR in GAIL's natural gas transmission/ trading volumes over FY23-26E, it said.
"GAIL’s major pipelines (Urja-Ganga, Barauni-Guwahati and KKBMPL, already at 70-100 percent completion) should be commissioned over 2023-24 at an estimated cost of ₹35,000 crore. The new pipelines would connect multiple city gas/ industries/ refineries/ fertilizers, boosting GAIL’s gas transmission and trading volumes," noted UBS.
UBS expects a 77 percent increase in transmission revenue over GAIL FY23-26, driven by improvement in realised tariffs and volumes.
Additionally, it sees transmission costs declining from the highs in FY23, due to a decrease in the cost of gas used as fuel in the transmission process. Transmission EBITDA could nearly triple from FY23 to FY26, added the brokerage.
"The transmission business contributed only 31 percent and 38 percent of segment EBITDA in FY22 and FY23, respectively, as a result of commodities segment volatility as well as LNG sourcing issues. However, our estimates suggest the transmission business contribution to segment EBITDA could be much higher (52-53 percent) in FY24-26E," it predicted.
At the same time, it sees stable earnings contribution from the natural gas trading segment (as opposed to the volatile earnings in the past), driven by GAIL's ability to place its entire LNG portfolio in India. Overall, it forecasts a 35 percent CAGR in standalone EBITDA over FY23-26.
GAIL's share price is up over 26 percent in 2023 YTD and 20 percent in the last 1 year.